Razel Ann GAlit Banking and Financial Institutions

BSBA FM2 – G2 Mrs. Aurora Susan Reyes

REVIEW QUESTIONS

1. Describe what Money is.

Any object or commodity that serves as an asset to its owner and is frequently accepted as a means of
payment for goods and services or for the repayment of debts is referred to as money. Currency is made
up of notes and coins that the national government has printed or struck. Money also includes monies
that are kept in a person's checking and savings accounts as electronic entries.

2. Explain briefly the significant of money in the economy of a country.

The fuel that keeps the wheels of our world turning is called money. By providing things and services
with an easily quantifiable worth, money facilities, and billions of daily transactions. Without it, the
trade and industry that support modern economies would sputter to a standstill, stopping the flow of
riches throughout the globe.

3. Briefly describe each of the four main functions of money.

Money acts as an intermediary between the buyer and the seller. Money must be widely
accepted as a method of payment in the markets for goods, labor, and, financial capital.

 Store of value - This function does not require money that money is a perfect store of value. In
an economy with inflation, money loses some buying power each year, but it remains money.
 Unit of account - It is the ruler by which other values are measured. Money acts as the common
denominator, by accounting method that simplifies thinking about trade-offs.
 Standard of deferred money - This means if money is usable today to make purchases, it must
also be acceptable to make purchases today that will be paid in the future. Loans and future
agreements are stated in monetary terms and standard of deferred payment is what
allows us to buy goods and services today and play in the future

4. Describe the history of money in the Philippines.

Prior to its creation, individuals engaged in bartering, exchanging items they created for necessities
obtained from others. Barter works well for straightforward transactions but falls short when the goods
being exchanged have different prices or aren't readily available. Contrarily, money is widely
acknowledged and has a recognized uniform worth. Money has evolved into a very complicated system
over countless years. At the dawn of the modern era, both private citizens and governmental entities
started to establish banks and other financial institutions. In the future, common people would be able
to invest their income in businesses, create their own businesses, borrow money to purchase real
estate, and deposit their money in a bank account to earn interest.

5. Explain briefly how money facilitates the flow of resources in the macroeconomy.

In the circular model of macroeconomy, money supports the movement of resources. The economy
will lag if there is insufficient money, and inflation will result from rising price levels if there is too much
money. In either case, keeping an eye on the supply and demand for money is essential to the central
bank's monetary policy, which attempts to stimulate economic growth and keep prices stable.

6. Enumerate and describe the sources of demand for money.

Money demanded day-to-day payments through balances held by household and firms. This
kind of demand varies with GDP, it does not depend on the rate of interest.

 Precautionary demand - Money demanded as a result of unanticipated payments. This kind of

demand varies with GDP.

 Speculative demand - Money demanded because of expectations about interest rates in the
future. This means that people will decide to expand their money balances and hold off on bond
purchases if they expect interest rate to rise. This kind of demand has a negative relationship
with the interest rate.

7. When is an asset suitable to use as a medium of exchange?

A medium of exchange is a temporary tool used to settle trades of goods and services between market
participants. It ought to be reliable, transportable, interchangeable, and have a constant inherent worth.

8. Why are economists and policy makers interested in measuring money?

Cash is not everything. However, economists and national leaders (policymakers) are becoming more
and more interested in evaluating money because it evaluates the prosperity of the country. The BSP is
also in charge of deciding how much money is available, and they have an impact on how banks create
money and regulate its availability in the market. The cost of borrowing money will fluctuate as a result
of changes in the money supply, which will also alter the interest rate. Consumption and investment
levels in the economy will be impacted by this.

9. A student makes the following assertion:

“if it is not possible for the total value of production to increase unless the money supply also
increases. After all, how can the value of the goods and services be being brought and sold
increase unless there is more money available.”

Explain whether you agree with this assertion.

This claim is untrue, as the overall value of production can rise without the money supply following suit.
The nominal Gross Domestic Product (GDP) or the letters PY are used to express the total value of
production. We can state that nominal GDP or total value of production (PY) can increase without the
money supply (M) also increasing or it can remain constant as long as the velocity of money (V)
increases using the equation of exchange, PY = MV, where PY is the nominal GDP, M is the money
supply, and V is the velocity of money - the average frequency with which a unit of money is spent.
 10. What is the future value of a P250 annuity at the end of the next 5 years if the annual
compounding rate is 10%?

FVA = 250 [(1 + 0.10 )5− 1]/0.10

FVA = 250 [(1 + 0.10) 5 − 1]/0.10
FVA = 250 [(1.10) 5 − 1]/0.10
FVA = 250 (1.61051 – 1)/0.10
FVA = 250 (0.61051 / 0.10)
FVA = 250 x 6.1051 FVA =1,526.28

11. Which alternative do you prefer P4,500 cash or P1,200 each year for a period of 4 years?
Assume a discount rate of 10% annuity.

I would rather have P4,500 in cash than P1,200 per year for a period of four years, even with a 10%
annuity discount rate, because I believe that a peso of cash flow provided to you over a period of four
years is less value than a peso paid to you immediately. Even if there is a significant difference between
P4,500 in cash and P1,200 a year for four years with a 10% annuity. With that money, I can deposit it in a
savings account where I will collect interest, which after four years will be greater than the P1,200 per
year for four years with a discount rate of 10% annuity.

12. Some investment analysts argue that very low interest rates on some long-term bonds make
them risky investment.
What do interest rates and prices of financial securities move in opposite directions?

The price of investments decreases when interest rates rise (and vice versa), with long-term bonds being
the most vulnerable to fluctuations in rates. This is due to the fact that longer-term bonds have a
longer duration than shorter-term bonds, which are closer to maturity and have fewer coupon (interest)
payments left. Additionally, long-term bonds are more susceptible to interest rate changes over their
remaining length. Long-term bonds with low interest rates are therefore dangerous investments
because as the market's interest rate declines, older bonds with lower interest rates lose value because
their coupon payments are now less than those of newly issued bonds.

13. Is a peso today worth more than a peso next year if the annual rate of inflation is zero?

Future money is discounted by the interest rate to determine the time value of money. Typically, the
nominal interest rate rather than the real rate is applied. The nominal interest rate, expressed in
percentage terms, is the amount of money that is earned for every 100 invested pesos. The nominal
interest rate is subtracted for inflation to get the real interest rate. Zero inflation will have the effect of
making the nominal interest rate equal to the real interest rate.

14. Does preference of liquidity increase or decrease the cash value of a future income?
Explain in your own words.

The preference for liquidity raises the cash value of future income since an investor should seek a
greater interest rate for securities with longer maturities and a shorter interest rate for securities with
shorter maturities. The cash value of future income will rise thanks to investments or securities'
interests.
 15. Which offer would you rather accept: an investment paying 10% compounded
annually, or an investment paying 10% compounded quarterly?

An investment yielding 10% compounded weekly is preferable to an investment paying 10%

compounded annually in my book. Profit will be higher from an investment paying 10% compounded
quarterly than from an investment paying 10% compounded annually. While the latter will only have an
interest once a year, the former will have an interest four times a year. Additionally, because it is
compounded quarterly rather than annually, the interest will be added to the principal to obtain the
interest for the following quarter, which is much more advantageous. After four years, an investment
paying 10% compounded annually will equal the profit made in a year by an investment paying 10%
compounded quarterly.

16. Why don’t bank like inflations?

The loss of a currency's relative purchasing power over time is referred to as inflation. The rise in the
average price level of a basket of chosen goods and services over time in an economy can serve as a
quantitative indicator of the rate at which the reduction in purchasing power happens. Banks and other
creditors dislike inflation. The amount that their debtors would eventually repay them will be worth less
due to inflation. Unexpected inflation hurts lenders because the money they receive in repayment has
less purchasing power than the money they leased out. Unexpected inflation benefits borrowers
because the money they receive in repayment is worth less than the money they borrowed.